July 4, 2022

Volume XII, Number 185

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A Shareholder? May Depend on When Company Sends Information

Where a company provides the requisite information to prove the recipient is a shareholder, such information may nonetheless be inadequate if not received “within a reasonable time” after shares in the company are issued or transferred. Faw v. Wilkes Sombrero, Inc., 2021 NCBC 80 (J. Earp).  Because only a jury can determine what constitutes “reasonable time,” the Business Court held summary judgment was inappropriate for Plaintiff on his claim that he was a shareholder.

J.C. Faw (“Faw”) and his brother-in-law, Wade Durpree (“Dupree”), were the sole shareholders of Wilkes Sombrero, Inc., (“Wilkes”), which owned a Taco Bell franchise/restaurant in Wilkesboro beginning in 1987.  In 2006, Dupree resigned as Wilkes’ president, transferred his 49% ownership in Wilkes to Faw and moved to Arizona, leaving Faw the 100% owner of Wilkes and its president and secretary.  At that time, Faw allegedly offered Plaintiff (one of his relatives) a 10% ownership in Wilkes if Plaintiff took the required Taco Bell training program and thereafter operated the restaurant.  Plaintiff accepted the offer. In January 2006, after Plaintiff completed the training program, Faw signed a form for Taco Bell (in his capacity as secretary for Wilkes) that stated Plaintiff was a 10% owner in Wilkes. The form bore Wilkes’ seal, contained the name of the issuing corporation, the name of the shareholder and his percentage interest, all requirements under N.C.G.S. §55-6-26(b) and § 55-6-27 to evidence proof of stock ownership where a company has not issued actual stock certificates.  In 2007, Plaintiff and Faw entered into another franchise agreement with Taco Bell for a second restaurant in Wilkesboro and, again, the forms signed by Faw showed Plaintiff had a 10% ownership interest in Wilkes.  When Faw died in February 2019, his co-executors refused to acknowledge Plaintiff as a Wilkes’ shareholder. When the co-executors tried to assign Wilkes’ Taco Bell franchisee rights to another entity, the proposed assignee required Plaintiff’s consent before taking the assignment (believing him to be a shareholder in Wilkes based upon Taco Bell’s records). Plaintiff refused to consent and filed his complaint against Faw’s estate asserting both individual and derivative claims. Both parties then brought motions for summary judgment, contending that the issue of whether Plaintiff was a shareholder in Wilkes should be decided in their favor as a matter of law.

The Business Court disagreed.  The Business Court first rejected Defendants’ contention that the absence of a stock certificate listing Plaintiff as a shareholder was fatal to Plaintiff’s shareholder claims.  The Business Court held that North Carolina recognizes a shareholder can possess uncertificated shares of stock, so long as certain statutory requirements are satisfied.  In response to Plaintiff’s request that he had proven that he was a stockholder in Wilkes as a matter of law based upon the information contained in the Taco Bell-related forms,  the Business Court acknowledged the various information could satisfy the statutory requirements for proving stock ownership in the absence of certificated shares. However, the Business Court nonetheless noted that the statute required Wilkes to have provided the information “within a reasonable time” of issuance of the stock. (Opinion, ¶29).  Because only a jury could determine “[w]hether [Wilkes] had sent the information to Plaintiff within a reasonable time,” the Business Court held summary judgment in Plaintiff’s favor on the issue of whether he was a shareholder in Wilkes was inappropriate. (Id., ¶30). Although the Business Court subsequently commented that it would be a strange result if Wilkes, “could unilaterally deprive a shareholder of ownership rights through its own failure” to act (Opinion, ¶31, fn. 8), it nonetheless determined that a jury must decide whether Wilkes sent the information to Plaintiff “in a reasonable time” such that he was a shareholder.

Based upon this decision, a business should consider whether it is advantageous for it to send the requisite writing to any stockholder who does not otherwise receive a share certificate.

Additional legal points:

  • North Carolina law only provides that shares may, but do not have to be, represented by certificates (unless the Articles of Incorporation or bylaws require it).  (Opinion, ¶25).  

 

Copyright © 2022 Womble Bond Dickinson (US) LLP All Rights Reserved.National Law Review, Volume XI, Number 356
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About this Author

Phil Mohr Bankruptcy and Litigation Attorney Womble Bond Dickinson
Partner

Phil is a trial lawyer. Although he will search for creative legal and business solutions for his clients, his more than two decades of trial experience for both publicly traded and privately held companies in state and federal courts throughout the country have taught him that some cases simply have to be tried to verdict. Representing companies that have both been wronged and accused of wrongdoing, Phil has honed his trial skills in cases involving complex business litigation (including fraudulent transfer and equitable subordination cases in federal bankruptcy court)...

336.721.3577
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